A. Quantitative easing, or QE as it is affectionately known by economists, is a way central banks can inject more money into the economy.

They do this by purchasing securities, like government bonds or parcels of mortgages, using new money that the central bank has created.

Q. How does it work?

A. The idea is that by putting more money into the financial system banks will need to find something to do with it, hopefully lending it to businesses and consumers so they invest and spend more, kick-starting the economy.

The secondary purpose is to avoid deflation, which can be very damaging, as it was in the Great Depression. If an economy slips into a deflationary cycle, consumers will tend not to spend money as goods and services are likely to be cheaper in the future than they are currently. This reduces demand, and causes businesses to cut prices even more, making the downward spiral worse.

By putting more money into the economy, the central bank is lowering the value of the currency, thus tending to push prices higher and avoiding deflation.

This also has the benefit (for US trade exposed industries) of lowering the value of the greenback against other currencies that are not engaging in QE – we have seen this happen with the US dollar falling in value against the Australian dollar after Ben Bernanke's announcement.

Q. Why is it being used?

A. Basically because the US central bank has run out of other options. Its interest rates are near zero, so they cannot realistically be cut any further to boost lending and demand in the economy.

The US government is paralysed by Congress blocking any moves towards more fiscal stimulus (i.e. increased government spending or reduced taxes) so it is not able to boost growth.

The US economy is stuck with unemployment above 8 per cent (a full 3 percentage points higher than Australia) and growth less than 2 per cent (almost half Australia’s growth rate, and coming off a much bigger fall during the financial crisis).

At the same time inflation has been easing since September last year and is also now below 2 per cent, meaning it seems safe for the Fed to pump more money into the economy without inflation getting out of control.

Q. What are the risks?

A. The main risks with QE are threefold:

The first is that is does not actually achieve the desired result of boosting economic growth because Americans are so indebted they do not want to borrow more, no matter how cheap the loan is.

The second is that banks and other investors take the money and stick it into assets like shares and commodities, rather than lending it for more productive purposes like business investment. That happened with the last two QEs, which pushed asset prices higher, including in already over-heated developing markets as cheap money flooded out of the US looking for better returns. However, China and many other developing economies could actually do with some stimulation at the moment, so maybe the US investment flows might boost the global economy this time around.

The third risk is that inflation does get out of control. US inflation is very low at the moment, but the combination of money flowing into areas like metals, agricultural commodities and oil and a severe US drought that has cut that country’s agricultural output, could see prices rise in the US and around the world. Thus the Fed’s action may spark not only a US prices outbreak, but also a global inflation increase. However, price rises are currently weak around the globe, so this does not appear as much of a risk as it was with QEII.

Q. Quantitative easing is another way of saying 'printing money'.

The end result is the value or the buying power of the US dollar is decreased.

The end result is that quantitative easing is inflationary. It takes more dollars to buy the same goods you were buying yesterday.

Why do economy experts believe this is a good thing?

- computersange via story comment

A. Economists do not think reduced purchasing power is a good thing, it just happens that economic history has generally shown moderate inflation to be much healthier than any degree of sustained deflation.

If prices are going up, people will tend to consume now, however if prices are always going down then people will tend to indefinitely defer non-essential consumption, leading to lower demand, more price falls, even lower demand, more job losses, more price falls, and so on.

In other words, inflation is the lesser of two evils, and that is why most developed economy central banks set an inflation target somewhere in the 1-3 per cent range.

A lower US dollar will also make the country’s exports relatively more competitive, and imported goods relatively less competitive, boosting the preference for goods made in the States. That is why many economists and business people are concerned about the relatively high level of the Australian dollar.

Q. What ways could this American initiative be manipulated for personal/corporate gain?

A. Obviously, financial institutions generally like the idea of being able to get cheap money from central banks so that they can go off and try and find places where they can earn a lot more than what they are paying for the cash.

If QE succeeds in boosting inflation, it is not good for savers as it reduces the value of money, it therefore tends to favour debtors (like the US government) over creditors (like the people who own US government bonds) by reducing the ‘real’ (inflation adjusted) value of those debts.

Q. I gather quantitative easing is econ-speak for printing more money.

I'd be interested to understand what the ramifications of this are when we do it (ie will it impact my own personal investments in any way) and when other countries do it.

A. Australia is highly unlikely to engage in quantitative easing, as it tends to be a last resort when interest rates are close to zero and further rate cuts would have no or little effect on lending rates or the supply of money in the economy.

In Australia, the RBA still has at least 2.5 percentage points worth of rate cuts to go before the cash rate hit 1 per cent and it would be likely to start considering quantitative easing.

Globally, the last two QEs have pushed asset prices higher, so you are likely to see any stock investments (especially in miners) bounce in the short term. However, these rallies have not proved to be sustainable in the past.

Australians are also likely to see the dollar remain stronger against the greenback than it would if the US was not increasing the supply of its currency so aggressively. A rise in inflation caused by printing money is also relatively worse for savers (as it reduces the future value of your savings) than borrowers (as it reduces the future value of your debt).

Q. Also, what are the economics conditions that would result in Australia implementing this and are these inline with the the US and Europe, and is this an RBA controlled thing or something that the parliament would enact?

A. As above, the RBA is unlikely to consider quantitative easing until the cash rate falls below 1 per cent, and cannot be cut much further, or banks completely stop passing on ANY cash rate reductions implemented by the RBA. Neither of those events seem likely in the near-term.

To my knowledge, the RBA has sufficient power over its own money market operations to conduct its own version of QE without any legislative changes, however I will endeavour to confirm whether this is correct.

Q. Does QE differ in any meaningful from what the Weimar Republic did in the 1920s?

A. Yes. In this case it is a bond buying program, so the Fed is actually purchasing mortgage securities with the new money. More significantly, both actual inflation and inflationary expectations remain low.

This sounds flimsy, and perhaps it is, but it is how monetary systems have operated since the gold standard ended.

Basically, market participants and the general population have not lost faith in the currency, and do not believe that the Fed will generate enough extra currency to make the US dollar next to worthless.

Considering the size of its economic output, the amount of money supply the Fed has and is planning to introduce into the system is relatively small, especially compared to the Weimar Republic and Zimbabwe.

Q. How much more can the the US print before their money is worth nothing and they lose reserve currency status?

A. A lot. Remember that many of the world’s biggest banks are still American, New York is still the centre of the global financial system, and China holds trillions of dollars of greenback-denominated US bonds.

A ship that big is hard to sink quickly, and it is in no one’s interests to torpedo it.

Q. Can America ever actually repay the debt in the future, without defaulting?

- tree frog via story comment

A. Quantitative easing makes US debts easier to repay by devaluing the currency they are denominated in.

QE that buys government bonds (the latest round is buying mortgage securities) also helps soak up government debt.

US public debt currently stands at around 109 per cent of GDP according to OECD estimates, Japan’s is around 214 per cent and it is not the world's reserve currency and its economy has been struggling a lot more than America's.

You would have to agree with the ratings agencies that Japan is more likely to default on its debts than the US.

The current levels of US debt relative to GDP are also slightly less than those at the end of World War II, and the US managed to pay those back down without default.